The Limits on Mortage Relief

If you are hoping for mortgage relief under the new Hope for Homeowners Act, here’s another factor that you and your lender will have to work into your numbers.

The effective interest rate on new mortgages made under the law is on track to exceed 8% a year.

That’s hardly a bargain. For a lot of people, this may limit the relief offered. And it also suggests lenders may have to agree to deeper write-offs than realized to make the law really effective.

The law empowers the Federal Housing Administration to underwrite new, 30-year fixed-rate loans to some homeowners who are currently in trouble on their mortgages. To benefit, your lender will have to agree to slash the size of the outstanding mortgage to 90%, or less, of the property’s current value.

At the moment the interest rate on 30-year fixed rate FHA loans is 6.625%.

And the law adds an annual “insurance premium” on top of each loan to help pay for the new program’s losses. The premium is 1.5% of the loan amount.

Add the two together, and right now you would be paying just over 8.1% a year.

On a $100,000 loan that would cost $762 a month in the first year.

It is, of course, always possible long-term interest rates will fall by the time this law kicks in on October 1. The rates are substantially driven by the government bond market.

But it is also possible long-term interest rates will rise further. That would almost certainly happen if the market began to anticipate an economic recovery, or a rise in inflation.